"Market Is Increasingly Short 'Time'": Goldman's Hedge Fund Honcho Lays Out The 'Tactical' Bull & Bear Case

In many ways, Goldman Sachs head of hedge fund coverage, Tony Pasquariello, says this conflict is the ultimate jigsaw puzzle for market participants. 

The day-to-day barrage of headlines around Iran has become all-consuming and game-theory is running full tilt. 

In order to try and make sense of that, the hedge fund honcho lays out below what he's seeing / hearing / thinking.

Market direction. 

At the risk of over-reduction, here’s one way to frame things:

A tactical bull case:

i. most everyone I speak with in the professional trading community is bearish and broad measures of sentiment are bombing. 

ii. on the systematic side, the CTA community has already shed a ton of length. 

iii. on the discretionary side, large index shorts are now in place. 

iv. the RSI on S&P (and NDX) hasn’t been this low since last April. 

v. judging from news flow this week, one can envision the general contours of a deal framework. 

A tactical bear case:

i. outside of certain corners of the fast money community, capitulation has not been seen. 

ii. considering this is the largest oil shock in history, the US market has NOT sold off all that far. 

iii. the physical commodities folks tell a very disquieting story.

iv. price action in global bond markets is similarly eerie. 

v. the intensity of this conflict has NOT ebbed for a critical 48-72 hour period.

Where Pasquariello comes out:

i. the first section above would suggest market technicals are better balanced. 

ii. the second section would argue the broader set of risks is still biased towards bad outcomes. 

iii. I expect that gap up / gap down will continue.

iv. risk / reward is not necessarily clear to me, but my instinct is that downside asymmetry still outweighs upside asymmetry. 

The view from the road...

I spent a few days in Europe this week. 

To repeat a recent comment, those who know the most about physical commodities seem more worried than the generalists. 

What we’re talking about here is the ongoing and severe disruption in the physical flow of oil, gas and refined products -- and the policy restrictions that follow (e.g. export bans, fuel rationing, mandated WFH). 

On one side of the draw, this is bad for business -- inflation, by any other name, with increasingly strong consequences for growth. 

On the other side of the draw, these are physical markets that live in the reality of today, while stocks discount forward conditions and should quickly respond to a genuine truncation of the left tail. 

At this point in the sequence, the markets are mostly treating this situation as a supply-driven inflation shock -- and not necessarily a significant growth shock. 

You can see this in various assets:

One bright-and-shining example is the brutal selloff in global front end rates...

On the equity side, the cyclical parts of the market have outperformed, both outright and relative to defensives (check out ticker GSPRGDPT). 

I believe the longer things drag out, the more vulnerable the market becomes to a genuine growth scare (as a colleague put it, “the market is increasingly short time”). 

When looking at some notes this week, I forgot how messy things were a year ago. 

From the highs of February to the lows of April, S&P drew down 19%. 

Keep going: the VIX spiked over 65 in the summer of 2024 ... the BKX index barfed 35% around SVB in 2023 ... NDX dropped a full 33% in 2022 ... the Omicron and Delta variants spooked the market at various turns in the fall of 2021 ... all of which pales in comparison to the fireworks around peak COVID. 

I say all this to again illustrate that the damage in this episode has yet to be that significant. 

As a client recently remarked, “geopolitics don’t always matter in the way that market participants expect.”

Europe.

I’ve received lots of questions on whether the trading community will stick with length that was accumulated in European equities last year.

Judging from GS PB data, the answer is a hard-and-fast no. 

It’s here I’ll register that we cut our Euroland GDP forecast for 2026 (to about half of what it was pre-conflict) and now call for two hikes from the ECB (April, June).

Asia. 

In contrast to the prior point, I’d argue that Asian equities trade fairly well. 

Take Korea as an example: amidst a steady dose of foreign selling, and a sudden correction in US memory names, KOSPI is still up a full 29% YTD. 

Alongside this, I’m impressed with the resilience of Japan given its commodity sensitivity (note TPX managed a 1% rally this week). 

Based on what I hear from clients, of all the options on the board, Korea and Japan are the two markets in which folks retain the most medium-term confidence.

Flow-of-funds / positioning.

The story in hedge fund land remains clear as day: net exposure has been cut to modest levels, while gross exposure remains notably high. 

Taking the full GS PB book and measuring against the past three years, net registers in the 33rd percentile, and gross registers in the 100th percentile. 

Ahile equity long / short clients have actively reduced gross positions over the past three weeks, in the context of VERY high realized volatility in the momentum factor, my instinct is it needs to be culled further. 

Away from the levered community, I see a mixed bag: active long only funds have been net sellers, while quarter end should bring pension fund demand (and better gamma dynamics for option dealers).

The options market. 

For all of the recent wildness, if you’ve been buying short-dated gamma and sitting on it, you really haven’t been paid. 

While the chart below doesn’t necessarily tell the full story, it does capture rolling p/l if simply long of 1-week straddles on S&P. 

As Shawn Tuteja pointed out to me, since August of 2024, VIX calls haven't carried well -- and since April of 2025, S&P gamma hasn't carried well; “it's almost as if the market, once it draws down on a trade, doesn't make it easy for that trade to work subsequently.” 

There are times when short-dated INDEX options have huge utility and make navigation easier; unfortunately, this hasn’t been one of those times.

A final point: a sign of the times... 

The red line is forward P/E ratio of NVDA; the green line is the forward P/E ratio of XOM.

Pasquariello sums up everything above in four words: the tails are fat.

"I still see no reason NOT to simplify your risk, raise a bit more cash and be in position to throttle up on the other side of this (easier said than done, I know)."

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